Two of the worst-performing S&P 500 stocks in 2011 are Monster Worldwide (NYSE:MWW) and Whirlpool (NYSE:WHR), down 68% and 49% year-to-date. Many pundits will advise investors to avoid these two stocks, as they are falling knives. Don’t pay attention to them. Both of these companies will see better days ahead. Those with the courage and conviction to buy at these prices will be rewarded in 12 to 24 months.

Monster Worldwide

The online job site had a horrendous year in 2011. Monster started out at $23.63 and saw monthly declines in eight of the next 12 months. Monster’s demise, however, has been under way for some time. Since MWW hit a five-year high of $54.79 in February 2007, it has lost 86% of its value. Clearly, LinkedIn‘s (NYSE:LNKD) IPO in May didn’t help. Neither did continuing high unemployment.

The final blow came Dec. 8 when Standard & Poor’s announced it was moving Monster Worldwide from the S&P 500 to the S&P MidCap 400. At its highest point in 2006, MWW had a market cap just shy of $6 billion. Back then it was a true mid-cap. Now it’s one thanks to the generosity of Standard & Poor’s, which could have an argument of moving Monster — with its market cap of less than $1 billion — to the S&P SmallCap 600.

So why would anyone invest in a stock that has lost $5 billion in value? The simple answer is because private equity likely will swoop in with a leveraged buyout in 2012. Avondale Partners believes prospective buyers would be willing to pay a significant premium at this point, perhaps as high as $15 or more per share. Even then, they would be getting a steal.

Monster currently has net cash of $99 million. At $15 per share, potential buyers would pay $2.07 billion, including $223 million in debt. If said buyers invest $650 million of their own funds in the acquisition, the remaining $1.2 billion would be financed. Assuming an interest rate of 10% for that funding, the interest expense for an entire year would be approximately $129 million, and that includes 4% interest on the existing debt. By utilizing Monster’s $322 million in cash, they could cover interest expense and capital expenditures for the next 20 months without taking into account any increases in operating cash flow during this time — or the fact my 10% assumption is fairly high.

When you consider that Monster increased free cash flow by 216% in the first nine months of the year to $79 million, it’s hard to understand all the negativity surrounding its stock.

Whirlpool

While the appliance manufacturer’s stock hasn’t done as badly as Monster in 2011, Whirlpool still has taken it on the chin. WHR’s enterprise value is just four times EBITDA; a year ago, it was 20% higher. Unfortunately, Whirlpool cutting earnings per share in 2011 by almost half its guidance of $7.25-$8.25 at the beginning of the year wasn’t going to embolden investors to take a risk. However, in terms of profitability, 2012 is shaping up to be much better.

In its third-quarter presentation, Whirlpool management outlined its plan for long-term shareholder value creation. It includes 5% to 7% revenue growth, 8% operating margins and 10% to 15% growth in earnings per share. The most aggressive of Whirlpool’s targets is the one for operating margins, which haven’t been any higher than 6.8% in the past decade — and that was eight years ago. If Whirlpool were to hit these targets over the next five years, you would be looking at approximate earnings per share of $14.39. That’s a forward P/E of 3 based on the Dec. 19 closing price of $45.37. That’s a best-case scenario, in my opinion. A more realistic operating margin of 6% would translate into earnings per share of $10.34 and a forward P/E of 4.4. That’s still excellent and much more obtainable.

With its strong brand recognition globally, Whirlpool’s revenue targets shouldn’t be a problem. It all comes down to moving gross margins from 14% today to 20% or higher, where they were prior to 2006 — not to mention delivering on its proposed cost savings of $200 million in 2012 and $400 million in 2013 and beyond. If Whirlpool does both of these, it has a real shot. Considering WHR traded as high as $112 as recently as May 2010, the reward easily outweighs the risks at this point.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned stocks.